The aggregate profit of Saudi Arabia's 10 largest banks rose by 2.7 per cent on quarterly basis in the first three months of this year on higher operating and non-core income, professional services consultancy Alvarez & Marsal has said.
The cumulative net profit for the three months to the end of March grew to 17.3 billion Saudi riyals ($4.6 billion), the consultancy said in its latest Saudi Arabia Banking Pulse report.
Profit was boosted by a 4.1 per cent increase in operating income and a “significant” 19 per cent quarterly rise in non-core income but was weighed down by higher impairment charges, which grew 14.4 per cent from the fourth quarter of 2022, it said.
Total net interest income – what banks earn from their lending activities minus the interest they pay to depositors – rose marginally by 0.5 per cent on a quarterly basis, the study showed.
Alvarez & Marsal remains bullish on the capital position of Saudi banks, which it considers to be “strong”.
However, it cautioned that they may face a possible slowdown in credit growth and a sharp increase in non-performing loans due to the higher interest rate environment, said Asad Ahmed, Alvarez and Marsal's managing director and head of Middle East financial services.
“The higher interest rate environment is causing customers to migrate to interest-bearing instruments; that is likely to affect the cost of funding for some of the banks,” he said.
The Saudi Central Bank last month raised its repurchase agreement rate by a quarter of a percentage point to 5.75 per cent and its reverse repo rate by a similar margin to 5.25 per cent, in line with the latest rate increase by the US Federal Reserve.
Banking is a key component of Saudi Arabia's economy, and the sector recorded strong growth in 2022 on the back of an improving economic scenario.
The kingdom's economy, the Arab world's largest, expanded by 3.9 per cent in the first quarter on an annual basis, boosted by growth in its non-oil sector as it continues to diversify to reduce its reliance on hydrocarbons.
Business confidence in Saudi Arabia also continued to outpace the long-standing average readings.
Last month, the headline Riyad Bank Saudi Arabia Purchasing Managers' Index reading stood at 58.5, slightly lower than the 59.6 registered in April, but well above the neutral 50-mark that separates economic expansion from contraction and its long-running average of 56.9.
Alvarez & Marsal's survey covered the kingdom's 10 largest listed banks – Saudi National Bank, Al Rajhi Bank, Riyad Bank, Saudi British Bank, Banque Saudi Fransi, Arab National Bank, Alinma Bank, Bank Albilad, Saudi Investment Bank and Bank Aljazira.
Their combined loans and advances grew by 3.2 per cent while deposits increased 4.7 per cent, both on a quarterly basis.
The lenders' loan-to-deposit ratio, which is used to assess liquidity by comparing total loans with total deposits, declined by 1.4 per cent to 95.2 per cent in the first quarter, after rising for eight consecutive quarters, it said.
The overall cost-to-income ratio improved by 146 basis points on a quarterly basis due to a growth in operating income and a decline in operating expenses, it said.
